Adams Lee

Earlier this month I wrote about it was not clear whether the U.S. antidumping order on garlic from China helped domestic garlic producers. One of the unusual consequences of this garlic antidumping order was that the California garlic producers had worked out an arrangement that allowed Chinese garlic to be imported from one “fair” supplier (Harmoni), while blocking the vast majority of all other Chinese garlic sourced from “unfair” suppliers.

The latest Department of Commerce (DOC) annual administrative review threatened to destroy that cozy arrangement between the California garlic growers and Harmoni because a couple of New Mexico garlic growers had filed a request seeking DOC review of Harmoni. The DOC had accepted the New Mexico growers’ review request and had initiated a review of Harmoni. Harmoni did not respond to the DOC’s questionnaires, so DOC issued a preliminary determination finding Harmoni would be subject to a 376% dumping rate. But the DOC was still considering arguments that the New Mexico garlic grower’s review request for Harmoni was invalid and should not have been accepted by DOC in the first place.

Last week, the DOC issued its final determination for this garlic review, and concluded that the review request filed by the New Mexico garlic growers was not legitimate and therefore its review for Harmoni and its 375% dumping rate would be rescinded. As a result, Harmoni is able to maintain its zero dumping rate and continue supplying California garlic growers with Chinese garlic.

The DOC rejected the New Mexico garlic growers’ review request because new information submitted after the preliminary determination called into question the credibility of their assertion that they were actually domestic garlic producers. For example, contrary to specific statements made on behalf of the New Mexico garlic growers, the DOC pointed to the record information showing Chinese garlic growers were in fact extensively involved in planning the New Mexico growers’ review request and had both directly and indirectly compensated the New Mexico growers and the U.S. attorney for participating in this review. One of the two New Mexico garlic growers dropped his support for the Harmoni review request and then submitted a bombshell statement admitting that his small garlic farm in New Mexico did not really compete with Chinese garlic. “Our stated moral high ground – ‘leveling the playing field,’ etc., etc. – inevitably came with a ‘wink, wink’ whenever we talked about it.” DOC concluded that “material misrepresentations” by the New Mexico garlic growers had tainted all their statements and information submitted by them and so it could not rely on any of the garlic production information demonstrating the New Mexico garlic growers were in fact domestic producers.

So in the end, the California garlic growers got the DOC decision they wanted, which was to keep Harmoni out of the DOC review process. This allows Harmoni, to continue reaping the benefits from being the only remaining Chinese garlic company with a zero dumping rate. This also allows the California garlic growers to remain protected by incredibly high dumping rates that block most “unfair” Chinese garlic from sold in the United States, while still giving them direct access to cheaper Chinese garlic from the sole “fair” Chinese garlic supplier — Harmoni. In the end though, U.S. consumers bear the cost of protecting the handful of California fresh garlic producers still surviving.

I’m sure there will be other attempts to break down the antidumping barriers that block most Chinese garlic from the U.S. market and keep U.S. garlic prices the highest in the world. Perhaps garlic growers in Minnesota or some other state will file another review request targeting Harmoni.

President Trump’s promises of tougher enforcement of U.S. trade laws has triggered the filing of an unprecedented wave of new antidumping (AD) and countervailing duty (CVD) petitions in the past few months. The U.S. already has many 397 AD and CVD orders in place, going back as far as 1977. These orders cover 157 different products imported from 43 different countries. Most of these AD/CVD orders (by far) are on Chinese products, ranging from aluminum extrusions to xanthan gum. But just how effective are these AD/CVD orders? To what extent do these AD/CVD orders help certain domestic United States industries, but also harm other domestic industries? What kind of unintended consequences result from these cases?

To answer these questions, I look at one of the older AD orders: fresh garlic from China, which has been subject to AD duties since 1994. One reason why this order has lasted so long is because the domestic U.S. garlic industry has been able to show it would be vulnerable to material injury if the AD order on Chinese garlic were revoked. Gilroy, California may call itself the “Garlic Capital of the World,” but it is China that produces around 75 percent of the world’s garlic. China produces approximately 20 million tons of garlic a year as compared to the United States, produces around 175,000 tons. This disproportionality has allowed U.S. garlic producers to successfully claim they would be obliterated by a flood of cheap Chinese garlic were the AD order ever to be removed.

The vast majority of U.S. fresh garlic is grown in central California, but growing garlic there is getting tougher because of a tightening supply of land, labor, and water there. California garlic acreage planted is down significantly from 2000, and recent US garlic crops have been affected by white rot, a soil disease. Harvesting and packaging fresh garlic requires manual labor which has been hard to find, and likely will get even harder under Trump’s anti-immigration policies. California garlic growers face fewer available workers and increasing labor costs, as fewer people want to work on farms. And as strip malls and suburbs creep towards farmland, property values are rising, making it even harder to find affordable housing for farmworkers. Garlic has also suffered from drought conditions in Central California for five years running and competition for scarce water resources has jacked up water costs for garlic growers.

The U.S. consumes about 260,000 tons of fresh garlic annually. After taking out the U.S. garlic used to make dehydrated garlic or as seed bulbs for the next garlic crop, U.S. garlic producers can now satisfy only about 30-40% of U.S. annual demand for fresh garlic. So, some imports are needed in the US market. Can AD/CVD laws effectively screen out unfairly traded garlic, while allowing in only the fairly traded garlic to fill the demand gap?

In the first few years after the AD order, Chinese garlic imports were completely shut out and U.S. garlic prices initially stabilized and then steadily increased. But by the mid 2000s, the US market price for garlic had risen so high that Chinese garlic could show they were selling at non-dumped prices even after absorbing initial AD duty deposits at 376%.

Between 2002 and 2007, the Department of Commerce (DOC) calculated zero or very low dumping margins for about a dozen Chinese garlic exporters. Not surprisingly, the volume of Chinese garlic imports into the United States increased, hitting about 72,000 tons in 2007. Since 2008, however, no Chinese garlic exporters have gotten any low AD margins calculated by DOC. More importantly, DOC has steadily knocked out Chinese companies that previously had low dumping margins, either by calculating higher updated margins in these later reviews or by applying the PRC-wide rate of 376% (or $4.71 /kg) because the responses from the Chinese garlic companies were deemed inadequate.

Out of all those Chinese companies that previously received a zero or very low AD margin, only one company, Zhengzhou Harmoni Spice (and their US affiliate, Harmoni International Spice), has been able to maintain an exemption from AD duties. This is because Harmoni worked out a deal with the California garlic growers (Petitioners) whereby Harmoni agreed to supply Chinese garlic to the Petitioners in exchange for the Petitioners agreeing not to request the DOC conduct another administrative review for Harmoni, which could result in Harmoni losing its zero dumping margin. Some disapprove of such arrangements as an inappropriate gaming of the system that allows the domestic industry to manipulate the trade laws to its own benefit. But others view these as reasonable settlements that allow both sides to benefit in some way from the DOC not conducting a review.

In this garlic case, Harmoni clearly benefits as the sole Chinese garlic exporter with full access to the US market because it does not have to pay any extra AD duty costs or deal with burdensome DOC reviews. Petitioners also benefit by getting access to lower cost Chinese garlic they can use to supplement their own production and improve their overall profitability. Petitioners saw Harmoni as a “good” Chinese garlic exporter who would act responsibly in the market and not drive garlic market prices down, unlike all the other “bad” Chinese garlic exporters. Since 2004, Petitioners thus have not included Harmoni in their annual review requests that usually target all the other Chinese garlic exporters. Under US trade laws, DOC annual review requests can be filed by domestic producers, US importers for their own Chinese suppliers, and Chinese suppliers only for themselves; Chinese suppliers cannot request reviews for other Chinese suppliers.

The AD duties imposed on garilc increase costs that ultimately are borne by the consumer. But when fresh garlic costs are such a tiny part of your fettuccine alfredo, consumers are willing to absorb or are blissfully ignorant of those extra AD duties that inflate the price of garlic and the garlic wars are mostly being fought outside the public eye.

However, the cozy arrangement between Harmoni and Petitioners is now at risk of falling apart, depending on DOC’s upcoming final decision in the latest garlic administrative review. The other Chinese garlic companies, unhappy at being excluded from Harmoni’s arrangement with Petitioners, found a couple of New Mexico garlic growers to serve as “domestic producers” who last year filed requests that DOC conduct a review of Harmoni. Petitioners and Harmoni immediately pointed out that these New Mexico garlic farmers did not have standing to file the review request because they were not really domestic producers like the large scale commercial garlic farms run by Petitioners that account for about 80% of US garlic production. DOC disagreed and has accepted the New Mexico growers’ review requests and initiated a review for Harmoni. In December 2009, DOC issued a preliminary determination noting that Harmoni had not responded to the Department’s questionnaires and would receive the PRC-wide rate.

Harmoni and Petitioners, however, are still arguing that the review for Harmoni should still be terminated because the review request filed by the New Mexico growers was fraudulent and cannot be a valid basis for a DOC review. DOC has received numerous filings with sordid details of how the Chinese garlic growers and their US attorney planned to use the New Mexico growers just to undermine Harmoni’s arrangement with Petitioners. Late in this review proceeding, one of the two New Mexico garlic growers withdrew his support of the original Harmoni review request once it realized it was just being used as a pawn by the Chinese garlic growers. Harmoni has also filed a federal racketeering action that is still pending against the Chinese garlic companies and their US attorney for conspiring to defraud the U.S. government by filing false documents with DOC.

We will soon find out in DOC’s upcoming final determination for this garlic review whether DOC will accept or reject the New Mexico garlic grower’s review request and thus whether Harmoni’s arrangement with Petitioners will collapse or continue. But the fact that DOC has even preliminarily accepted this New Mexico review request highlights how DOC’s administration of the AD/CVD laws is so unpredictable that even the domestic industry cannot count on how these cases will turn out. DOC’s acceptance of the New Mexico garlic growers’ review request for Harmoni is particularly surprising because the Trump administration has been so unabashedly protectionist and DOC claims to administer the AD/CVD laws to protect the domestic industry from unfair trade.

The AD duties on Chinese garlic thus far have significantly restricted Chinese garlic in the U.S. market. In part because of the high AD duties, US garlic prices are among the highest in the world. Petitioners have been able to find a “fair” Chinese garlic company to help supply them with lower cost Chinese garlic, while still blocking all other “unfair” Chinese garlic companies. And yet, this arrangement that has benefited the domestic industry may come undone if DOC continues to accept the Chinese/New Mexico review request of Harmoni. Given the difficulties unrelated to Chinese garlic (rising land, labor, and water costs), the last thing the “real” US garlic producers need is an unfavorable decision from DOC that will shut down Petitioners’ access to “fair” Chinese garlic and open the door to “unfair” Chinese garlic returning to the U.S. market. DOC’s handling of this garlic review request issue demonstrates the US AD/CVD laws are blunt tools that are inconsistently applied by DOC and often result in unexpected and unintended consequences that do not help the domestic industry.

The Trump administration just launched two investigations to see if steel and aluminum imports threaten to impair the national security of the United States. Because these investigations were self-initiated by the Trump administration, many believe it pre-ordained that some type of import restrictions will be imposed. But here are a few reasons why imports should not be restricted, from China or from anywhere else.

Past Section 232 determinations indicate steel/ aluminum imports are not a “national security” threat. Only 26 investigations have ever been conducted under Section 232 of the Trade Expansion Act of 1962. Prior Section 232 investigations defined “national security” as covering not only a military or national defense component, but also the general security and welfare of certain industries “critical to the minimum operations of the economy and government.” Most (19 out of 26) resulted in either a finding of no national security threat or no action taken in any way. Only crude oil from Libya and Iran were found to be a national security threat that warranted some type of import restrictions.

The most recent Section 232 investigation concluded in October 2001 and it was also on steel. Even taking into consideration the national security requirements of the post 9/11 campaign against terrorism, the Department of Commerce (DOC) found that imported steel did not threaten to impair U.S. national security. In that report, the DOC found that the entire US military’s steel requirements was less than one percent of the domestic steel industry’s production capacity. DOC concluded (1) that the U.S. was not dependent on imported steel, and (2) that steel imports did not threaten the ability of domestic producers to satisfy any US national security requirements for steel.

Current steel and aluminum data are similar to those considered in the 2001 steel national security investigation. Only 30% of imported steel and aluminum was used in domestic consumption in 2016, showing a lack of dependence on steel and aluminum imports. Even if current US military requirements for steel have doubled from 2001 requirements, this would still be less than one percent of the 88 million tons of steel produced in the United States in 2016. The objective data shows steel and aluminum imports do not pose a threat to national security interests. National security should not be used as a pretense for protectionism.

Import restrictions would harm downstream US manufacturers. Additional tariffs, quotas, or other import restrictions may temporarily create a pocket of artificially higher U.S. market prices for steel and aluminum, particularly when compared to the lower prices in the much larger global market. This may provide a short-term benefit to US steel and aluminum producers who would have substantially less competition after import restrictions are imposed. But downstream US manufacturers who use steel and aluminum to produce cars, air conditioners, washing machines, airplanes, and a host of other industrial and consumer goods will either bear any increased costs and disrupted supply chains, or pass those increased costs down to the ultimate buyer/consumer in the form of higher prices. For every one US manufacturing job saved at a US Steel or Alcoa, sixteen US manufacturing jobs at a Ford, Carrier, Whirlpool, or Boeing, will be put at risk, because their foreign competitors would gain a cost advantage over them because of the import restrictions driving up the U.S. steel and aluminum prices they need to make their cars, air conditioners, washing machines or airplanes. The Trump administration specifically noted that shipbuilding, aircraft and vehicles may also become subject to a national security investigation. But any import restrictions imposed to protect the steel industry would adversely affect these other critical industries that may have to deal with higher steel and aluminum costs. The collateral damage caused by any Section 232 measures could be significant.

How do you distinguish “good” imports from “harmful” imports? Canada is by far the largest source of steel and aluminum imports. A good number of Canadian producers are affiliates of US steel and aluminum producers. Chinese steel imports ranked 11th out of all 2016 imports and represented less than one percent of U.S. domestic production. The U.S. actually exported more aluminum to China (730,355 tons) than it imported (518,773 tons) in 2016. In the current 232 investigations, the USW has already asked that Canada be excluded from any import restrictions. “China’s the problem, not Canada or other countries which are following the rules,” said USW President Leo W. Gerard. Presumably Canadian imports are usually considered among the “good” imports. But given the recent trade flare ups with Canada involving softwood lumber, dairy, renegotiating NAFTA, and border adjustment taxes (BAT), it is no longer a given that the Trump administration will give any preferential treatment to Canada.

Import restrictions would not address the real problem of Chinese overcapacity. Any threatened import restrictions would do nothing to reduce the China’s excessive steel and aluminum production capacity. Many of Chinese steel and aluminum mills are inefficient, debt-laden “zombie” state-owned mills that need to be permanently shut down. If China doesn’t cut its production capacity and instead keeps churning out steel and aluminum and selling onto the global market, China’s surplus production will continue driving global prices down. No matter how high the United States tries to build a tariff wall, these U.S. import restrictions will do nothing to address the key cause of global price declines for steel and aluminum.

Import restrictions may trigger retaliation. Section 232 import restrictions have been referred to as the trade “nuclear option“because it is so hard to argue against measures allegedly used to protect a country’s national security interests. If the U.S. invokes “national security” to protect its steel and aluminum industries, other countries will likely claim similar national security interests to protect their own allegedly critical industries from imports. For example, China could claim its soybean industry needs protection from imported soybeans that come primarily from the United States.

Despite the harsh campaign rhetoric during the Trump presidential campaign, Trump as President touted the recently announced “early harvest” deal with China as “gigantic” and “Herculean” and as a reset of US-China trade relations. Though the Section 232 national security investigation would appear to be the perfect forum for Trump to single out Chinese steel and aluminum producers for indiscriminate production expansion, it is now unclear whether Trump will do so lest he jeopardize the budding relationship he has developed with President Xi Jinping. If Trump does go after Chinese steel and aluminum imports based on national security grounds, it seems certain China will retaliate and find some U.S. industry to target with its own counter-actions.

If these Section 232 investigations result in import restrictions on all steel and aluminum imports, or even just on Chinese imports, there is a very real possibility the following lose-lose scenario will ensue:

steel/ aluminum prices increase, but not enough for the U.S. steel/aluminum industries to improve enough to recover or add any new jobs;

downstream industries that use steel and aluminum get hammered by increased steel and aluminum prices and lose sales to cheaper foreign imports from companies that still have access on the global market to lower priced steel or aluminum;

key foreign allies get harmed by restrictions on all US imports;

China and other countries impose their own national security import restrictions in retaliation against the United States.

I would much prefer the DOC and President Trump come to recognize this is a weak national security case. Labelling steel or aluminum imports as a national security threat is neither necessary nor supportable by the facts. President Trump could take more moderate actions that may be enough to claim political victory while avoiding retaliation from global trading partners.

Emboldened by President Trump’s promise of tougher enforcement of U.S. trade laws, a fresh wave of new antidumping and countervailing duty (AD/CVD) petitions were filed in March by domestic U.S. industries seeking relief from imports. The petitions cover five products (silicon metal, aluminum foil, biodiesel fuel, wire rod, and carton closing staples) from all over the world from Argentina and Australia, to the UAE and UK. And of course, China. These petitions will trigger 25 separate AD/CVD investigations at the Department of Commerce.

However, one of President Trump’s first executive orders was to freeze hiring of any new or replacement federal government employees. If this hiring freeze continues, the Department of Commerce (DOC) may not have enough manpower to administer all these new AD/CVD cases. The DOC already has about the same number of on-going investigations that must be completed, along with an even bigger number of administrative reviews of all the existing AD/CVD orders that are still in effect. For each case, a DOC case analyst and attorney must draft and issue multiple rounds of questionnaires, review the responses and comments submitted, analyze all the issues raised, calculate AD/CVD margins, and draft decision memoranda. All these necessary tasks require a certain minimum amount of time to be completed. Without reinforcements, the expanding new case load threatens to stretch the DOC trade remedy team well past a reasonable or manageable work load.

Nine U.S. Senators have already asked President Trump to lift the hiring freeze for trade enforcement personnel at a variety of agencies such as DOC, Customs and Border Protection, USTR, and Department of Justice. They specifically noted that these agencies have been tasked with more extensive trade enforcement responsibilities, but the hiring freeze would have the effect of reducing the resources available for such enforcement.

Since the hiring freeze does not apply to military personnel or those deemed essential to security, maybe President Trump will find trade enforcement is essential to national security or carve out some other exception to allow new hires for the DOC and other trade related agencies. But if the DOC cannot hire enough personnel to administer cases properly, then perhaps it will develop leaner and meaner ways to handle these new AD/CVD cases. That is the fear of the international trade lawyers at my law firm and elsewhere, and it should be the fear of any company, Chinese or otherwise, that finds itself caught in the crosshairs of an AD/CVD petition.

For example, DOC may now try to decide more cases based on applying total adverse facts available (AFA), after finding the respondent exporter or producer to be non-cooperative because their questionnaire responses are deemed untimely or inadequate. Making this sort of finding will allow the DOC to avoid crunching all the submitted sales and cost data to get AD/CVD margins that often are not that high (particularly for non-Chinese market economy cases). This will give the DOC the highest AD/CVD margins possible with the least amount of work if the exporter/ producer gives up or is given a death blow.

Even if a respondent survives the questionnaire process and avoids a total AFA determination, the DOC now can generate higher AD/CVD margins by applying a new trade law provision which allows it to find a “particular market situation” justifying an upward margin calculation adjustment. This is what Peter Navarro, head of the newly formed National Trade Counsel, recently urged Secretary of Commerce Wilbur Ross to do in an on-going administrative review of Korean OCTG oil drilling pipe. In that case, Navarro and the domestic pipe producers wanted the DOC to make a “particular market situation” finding the Korean pipe producers benefited from subsidies embedded in their purchases of Chinese steel. Navarro relied on a “logical” presumption that the Chinese steel subsidies of 60% found in a prior unrelated case would be passed through to benefit the Korean pipe producers to generate a margin of at least 36%. Navarro’s back of the napkin calculation lacked even a napkin to support the calculation. Respondents in that case complained that Navarro’s email was an unprecedented intervention and an overt suggestion that DOC calculate a politically acceptable but factually unsupportable AD/CVD margin.

U.S. AD/CVD cases have long had a reputation for being more objective and fact/data intensive than those conducted by most other countries. But if political pressure and personnel limitations push DOC to make more arbitrary AFA determinations or politically motivated findings of a “particular market situation” U.S. trade remedy cases will soon lose any advantage of perceived objectivity or credibility. The Department of Commerce already has significant discretion to weigh the record evidence and make judgment calls favoring the domestic industry. But at least those judgment calls have been based on an analysis of specific record evidence. The new “particular market situation” provision appears to give DOC even more discretion to make adjustments based only the thinnest of factual basis. This shift towards a more politically-driven AD/CVD process may result in the Department of Commerce issuing higher margins in the short term, but over the long term, the AD/CVD process risks losing significant credibility. Trade remedy cases, by definition, are intended to be remedial, not punitive. DOC’s AD/CVD process is supposed to determine the “fair” normal value for subject imports. If DOC’s definition of a “fair” export price is not factually or legally based, but is instead arbitrarily determined by politically influenced adjustments, an exporter or US importer has no way to determine whether or how their pricing should be adjusted in order to be deemed “fair” by DOC.

What this means in real life for Chinese companies sending products to the United States, and to those who import products made in China, is that they need to be even more careful not to run afoul of U.S. AD/CVD laws and pricing. And when tagged for any AD/CVD violation, it is more critical than ever that they respond quickly and with as many facts as they can muster, thus making it harder for the DOC to make quick and random and financially deadly decisions.

China’s President Xi Jinping is scheduled to meet with President Trump later this week at Mar-a-Lago and trade issues are expected to be at the top of their agenda. President Trump has already warned on Twitter that this meeting “with China will be a very difficult one in that we can no longer have massive trade deficits … and job losses.”

President Trump’s tweet shows how he views China primarily through a US-China trade imbalance lens, linked to American job losses. Trump’s trade worldview ignores the surpluses in trade in services and T-bills the US has with China. He also disregards jobs created by U.S. manufacturers that use inputs imported imported from China to produce higher value added products in the United States. See China. Friend Or Foe? Opportunity Or Challenge? Or, Why Can’t We All Just Get Along? President Trump also refuses to acknowledge (or recognize?) that the United States has lost more jobs to automation than to trade with China. Focusing too much on US-China bilateral trade deficits is an incomplete and misguided way of looking at a far more complex US-China trade relationship.

President Trump also seems to believe China will be willing to renegotiate terms with the US because it is so dependent on the US market. Though China does see the US as a very good and very important market for its goods, it is also true that China exports to all corners of the world and its home market consumer demand is also rapidly growing. China will not agree to massive trade concessions out of a desperate need for access to the US market.

President Xi also likely will be able to use this meeting to score points for his constituents back home. He will almost certainly demand that the U.S. treat China as a market economy, as promised fifteen years ago in the US-China WTO Accession agreement, even though he knows there is no way the U.S. will grant China market economy status under President Trump’s watch. China thus far has not overreacted to any of Trump’s blustery threats and has instead patiently waited to see what specific trade actions Trump orders. Until President Trump orders 45% tariffs on all Chinese imports or labels China a currency manipulator, President Xi will almost certainly continue taking what the international community will view as the high road and just keep firing off missives about how no one wins in a trade war. If though President Trump takes strong concrete actions against China at this week’s meeting, you can be certain China will quickly retaliate by taking its own trade action.

President Xi likely sees this meeting as an opportunity to elevate China’s standing as a more reasonable global market player than the United States and if President Trump continues to antagonize its global trading partners, China becomes a more attractive alternative trading partner. Loans from the China Development Bank and Export-Import Bank of China already have become the a very important source of foreign financing throughout Asia, Latin America and Africa. If Trump wants the U.S. to scale back from participating on the global stage, China is more than willing to step up and try to fill the void.

There will be plenty of posturing and both sides will get the sound bites they want to satisfy their core constituents at home, but it’s not clear what, if any, specific tangible takeaways either side will get from this meeting. Time will no doubt tell and we will be reporting back.

Trading Babe Ruth was a big mistake. So what?Donald Trump is that fantasy sports team owner who vetoed every trade involving Team China or Team Mexico (except his own, of course). But now he’s become the league commissioner and he’s promised to fix or renegotiate all of those “bad” trade deals. Yikes.

Donald Trump and Peter Navarro, head of the newly formed White House National Trade Council, are always bitterly complaining about the huge trade deficit the United States has with China and other “bad” countries. But trade deficits should not be equated with unfair trade or with the alleged utter destruction of American manufacturing. This is like complaining that a baseball trade was so bad it caused the team not to win the World Series for, say, 86 years. Or, complaining that your team is suffering from a seven-to-one player trade deficit even though your team gave up seven players who were either nobodies, soon to be has beens, or never will bes, and your team gained a perennial All-Star or future Hall-of Famer in return.

The U.S. trade deficit with China does not mean the United States is losing to unfair trade. Trade of goods is just one part of what drives our economy. Though the United States may run a deficit in the trade of goods (both overall and with China), we run a surplus in the trade of services. Also, China and Japan each own more than $1 trillion in U.S. Treasury bills, bonds, and other securities. Moreover, foreign companies are “insourcing” and purchasing U.S. assets, such as buying U.S. companies or investing in building new factories, shopping malls, hotels, etc. Harping on the United States’ trade deficit while completely ignoring other economic factors in which the United States has a surplus is an incomplete and misguided way to evaluate how the U.S. economy is performing. Full disclosure: my firm and especially our international trade and our China lawyers have a lot of skin in this game as we generate millions of dollars a year in services directly related to US-China trade.

Looking at trade balances between countries as if they were a zero-sum game to be “won” or “lost” does not make sense because countries don’t actually engage in trade with each other on a national level. Only companies and individuals in each country trade with one another. A trade (for fantasy league baseball players or for real life goods) happens only if both sides believe they are exchanging comparable value with each other. China exports boatloads of goods to the United States because U.S. companies and individuals see those imports as the best value for their specific needs. A good chunk of the imports contributing to the U.S. trade deficit are used to manufacture higher value-added products in the United States. The U.S. imports crude oil for U.S. refineries to produce gasoline and other higher-value petroleum products. Boeing airplanes include all sorts of parts imported from around the world. If Party A and Party B each a consensus that a trade is mutually acceptable, and there is no sign of fraud or collusion, why should the President/League Commissioner intervene and try to fix those so-called “terrible” trade deals?

Even those trades perceived to have been lopsided or unfair does not mean that the losing team on the deal needs rescuing or that the deal should be voided or undone. Teams make stupid deals all the time.

Every team hopes to avoid making bad trades, just as reducing the U.S. trade deficit is not wholly a bad idea. But reducing trade deficits by itself will not restore America’s manufacturing jobs any more than avoiding bad trade deals by itself will get teams a championship ring. The effects of a huge trade deficit or a bad trade deal, either in the market place or on the playing field, tend to work themselves out over time because there are so many other factors that go into the country’s economic performance or team’s performance. A good President/League Commissioner would know better than to try to fix every “bad” trade deal or trade deficit he doesn’t like.

Editor’s Note: If you talk with people who regularly do business with China, especially people with companies that do business in China, they will mostly tell you that what they/we need is not so much higher duties on imports, but more pressure exerted on China to level the playing field for foreign companies doing business in China.

The U.S. International Trade Commission (ITC) yesterday determined by a 3-2 vote that the domestic U.S. tire industry was not injured or threatened with injury by imports of truck and bus tires from China. Although the U.S Department of Commerce last month in its concurrent investigations had determined that Chinese truck and bus tires were dumped and subsidized, the ITC’s negative determination means no more antidumping or countervailing duties (AD/CVD) will be collected on imported Chinese truck and bus tires.

The ITC’s negative determination is a good indication that for all the protectionist rhetoric and trade saber rattling from the Trump administration, the ITC is not just going to rubber stamp every case filed by a petitioning domestic industry. The ITC will still decide its AD/CVD cases based on the extensive amount of industry data collected from its investigations and will not rely just on the alternative facts offered by petitioners.

This tires case was weak from the outset. First, it was brought only by the United Steel Workers (which represents the workers at the big U.S. tire factories) and not by the tire companies themselves. Unlike virtually all other AD/CVD cases, the domestic producers in this case did not want to sign their name to the petition. Some have speculated that the Steel Workers filed this and other tire AD/CVD cases to obtain negotiating leverage to try to extract production and wage concessions from the U.S. tire industry management.

Although the U.S. market for truck and bus tires in 2015 was about $6 billion dollars, U.S. producers supplied only 60 percent of that demand. U.S. truck and bus tire producers already are operating at full capacity, so even with new U.S. tire factories opening, imports are still clearly needed to meet U.S. demand. China was the leading import source of truck and bus tires with about $1.2 billion imported in 2015.

All the U.S. produced tires were of premium brands, whereas most of the Chinese tires were sold under lesser known or private label brands. Because consumers generally associate producers’ brand names such as Goodyear or Bridgestone or Michelin with quality and performance, Chinese tires not surprisingly were priced lower when sold under a private label. This price difference associated with the different brands reflects the distinct market segments; the higher priced premium U.S. brands did not really compete with the no-name generics or private label Chinese tires. Moreover, though tire prices declined between 2013 to 2015, this was due primarily to declines in raw material costs, primarily natural rubber. Prices of U.S. tires sold to OEM customers fell at the same rate as prices for U.S. aftermarket sales, even though very few Chinese tires were sold to OEM customers. Chinese tires thus cannot be blamed for the price declines that were occurring.

The domestic tire industry also was performing quite well and thus had a hard time demonstrating it had been injured. The domestic industry was healthy as production, capacity utilization, shipments were all higher in 2015 compared with 2013. Employment, wages and productivity indicators also showed improvement. The domestic producers had high and rising profits (operating income = 20.7%; net income = 18.3%), even though prices had fallen. So, even as Chinese imports were increasing, U.S. tire producers were thriving.

Despite all of these facts, this case could have resulted in an affirmative injury or threat of injury determination based on the increasing volumes of low-priced Chinese import tires that reducing the domestic producers’ market share. An argument can also be made that the significant volume of Chinese tires caused the domestic industry to lose revenue and be less profitable than it would have been without the Chinese imports.

In its preliminary investigation, the ITC made an affirmative determination by a 4-2 vote that the domestic industry was injured or threatened with injury, but two of the six Commissioners changed their positions in the final investigation. Vice Chairman David S. Johanson had found a threat of injury in the preliminary investigation, but switched to a negative injury/ threat determination in the final. Commissioner Dean A. Pinkert voted affirmative in the preliminary determination but then abstained and did not participate in the final investigation. If either of these two votes had stayed affirmative, a 3-3 tie vote would have resulted in AD/CVD duty orders being issued. Given the closeness of the vote, I expect the United Steel Workers will appeal the ITC’s negative determination to the U.S. Court of International Trade

Ultimately, this ITC negative determination was not only a huge victory for the Chinese tire industry and for U.S. importers of those tires, but also for anyone who wants U.S. trade cases to be determined on the facts and the law and legal arguments presented and not just on a protectionist trade policy. The vast majority of petitions filed have resulted in AD/CVD orders being issued, and it likely will continue this way for the foreseeable future. Given the current political climate, however, it’s nice to see a negative ITC determination just to be reassured that the ITC still recognizes its obligation under U.S. trade laws to conduct investigations fairly and that not all AD/CVD petitions are deserving of trade remedy relief.

President Trump has already acted on some of his trade-related campaign promises. One of his first official actions was to withdraw the United States from the Trans-Pacific Partnership (TPP). Trump also floated the idea of imposing a 20% tax on all imported Mexican goods to pay for the US-Mexico border wall, but he appears to have backed off that idea, at least somewhat. Below I discuss how the Trump Administrations early trade actions may benefit China the most, instead of benefitting America “first.” I also discuss how China is not standing idly by, but rather is positioning itself to defend or retaliate against U.S. trade actions that target China.

Trump’s TPP Withdrawal. In signing the executive order withdrawing the United States from the TPP, President Trump merely signed the death certificate for a trade deal that was practically comatose well before he took office. Trump described the TPP (along with basically every other trade agreement) as a “bad deal” that would result in a “death blow for American workers.” Many commentators, however, have noted that China will be the biggest winner from Trump’s abandonment of the TPP. The TPP aimed to reduce trade barriers and tariffs across 12 countries, but specifically and tellingly did not include China. The TPP was part of a strategic U.S. pivot towards Asia that attempted to strengthen American economic ties in the region to counter-balance China’s increasing power there. With the demise of the TPP, other Asian countries such as Australia, South Korea, and the Philippines, likely will be pulled even tighter into China’s expanding economic sphere of influence in the region. China also has been handed an opportunity to fill the political leadership void in the region created by Trump’s withdrawal from TPP. China now could take the place of the United States in the TPP, but appears more likely to push for completing of its own proposed Regional Comprehensive Economic Partnership (RCEP), which includes many of the same Asian countries that were part of TPP, but not the United States. If RCEP is successfully negotiated, U.S industries stand to lose significant market share throughout the Asian countries that will have preferential rates with its RCEP partners, but not the United States.

Trump Floats, Then Walks Back, A Proposed 20% Tax on Mexican Imports. The Twitterverse exploded with people angry that avocados and tequila could cost more because of Trump’s proposal to impose a 20% tax on all Mexican imports. White House spokesperson Sean Spicer rushed to explain that the idea of the 20% tax was not really a policy proposal, but just one example of the options for how to pay for the U.S.-Mexico border wall. Trump’s having paused after proposing a 20% tax on imported Mexican goods got a bad reaction (“Guacapocalypse!!”) and that may bode well for China exports to the United States, at least temporarily. During the campaign, Trump had proposed a 45% tax on all Chinese imports. But if U.S. consumers hated the idea of a 20% tax on Mexican goods, it seems likely that a 45% tax on Chinese imports would trigger even greater outrage because of the broader spectrum of goods from China that would be affected. Instead of a straight tariff on imports, however, Trump may now try to impose a border adjustment tax (BAT) similar to what House Republicans have recently started pushing. But calling it a tariff or a more complicated BAT won’t change the bottom line, which is that either option would make imports more expensive and US consumers would bear the brunt of those increased costs.

China thus far has publicly taken the high road and stated no one wins in a U.S.-China Trade war. However, China also has taken the following steps to better position itself to defend, or to more aggressively retaliate, against the United States if Trump insists on escalating the trade war.

China’s WTO Challenge v. U.S. Continuing NME Status for China – China insists that when it negotiated the terms that allowed China to accede to the WTO in 2001, the United States agreed to treat China as a non-market economy (“NME”) in antidumping cases, but only for another fifteen years, after which it would be treated like all other market economy countries. Unfortunately for China, the Chinese negotiators for the 2001 US-China WTO Accession agreement were primarily politicos, and not lawyers. Because this agreement was not drafted precisely as the Chinese intended, the United States has been able to parse the language to come up with a plausible legal argument that the U.S.-China WTO Accession did not call for an absolute hard deadline for terminating China’s NME status, but rather provided only a conditional promise to terminate China’s NME status. The revocation of China’s NME status is a high priority objective among China’s leadership and immediately after the December 11, 2016 fifteenth anniversary of China’s WTO accession, China filed a WTO challenge against the United States’ continued application of NME status in antidumping cases against China.

China’s Increasing Opposition to U.S. AD/CVD Proceedings – China’s complaint against the United States’ refusal to grant market economy status will take many years to work its way through the WTO dispute settlement process. In the meantime, China will not just wait to see if the WTO will rule in its favor. China just within the past month has become more outspoken against U.S. Department of Commerce (DOC) determinations in AD/CVD proceedings against China. China’s Ministry of Commerce (MOFCOM) recently issued press releases objecting to specific methodologies used by DOC and ITC to obtain inflated AD/CVD rates in a wide variety of cases involving off-road tires, biaxial geogrids, hardwood plywood and amorphous silica fabric, carbon and alloy steel, and ammonium sulfate. Previously, MOFCOM typically would only monitor the outcomes of DOC and ITC cases without commenting on any specific issues arising from U.S. AD/CVD proceedings. This recent increased activity from MOFCOM objecting to very specific and often technical AD/CVD legal issues in US investigations signals a more aggressive policy stance by the Chinese government to support Chinese companies subject to US AD/CVD proceedings.

China’s AD/CVD Actions against U.S. Exports to China – Not only is China playing more aggressive defense in U.S. AD/CVD proceedings, China is also starting to take the offensive and initiate its own AD/CVD cases against certain U.S. exports to China. On January 12, 2017, MOFCOM announced the final results in the AD/CVD investigations against dried distiller grains (DDGs) from the United States and issued AD and CVD margins of 42.2%-53.7% and 11.2-12.0% that were higher than expected. DDGs is an ethanol by-product used as animal feed, and in 2015 China imported 6.8 million tons of DDGS from the United States worth $2 billion and was the single largest export market for U.S. DDGs producers. MOFCOM’s DDGs determination indicates that China is looking to use its own AD/CVD actions not only to score political points, but also to have an economic impact. It is rumored China already has received an AD/CVD petition against soybeans from the United States and is just waiting for an appropriate time to officially initiate these investigations, probably in reaction to a U.S. action against China.

Abandon/ renegotiate “bad” trade agreements such as the Trans-Pacific Partnership (TPP), and

Use the full arsenal of US trade laws against Chinese unfair trade practices.

The above proposed trade actions raise many legal and policy questions. Can a President Trump really do those things? Should he do those things? Will such actions achieve anything? Pundits, academics, lawyers, and ultimately U.S. judges will eventually weigh in on these questions for real, but China is not going to wait for the resolution of these questions. If the United States engages in some or all of the above Trump-proposed actions, China will no doubt retaliate with its own actions.

In this post I discuss three fairly likely ways China will respond to any attempts by a Trump administration to “get tough on China.”

1. China AD/ CVD Actions. Few realize that China has already initiated its own antidumping (AD) and countervailing duty (CVD) actions against companies from the United States and other countries. Having been on the receiving end of the bulk of AD/CVD actions worldwide, China has incorporated into its own AD/CVD procedures some of the most effective techniques and practices from the AD/CVD investigations conducted by the U.S., EU, and other jurisdictions on Chinese companies. For example, China’s AD questionnaires have burdensome and comprehensive sales and cost data requests, similar to, and even in some cases, exceeding US practice. China’s AD/CVD margin calculation methodologies are as non-transparent as the EU’s margin calculations. China has even copied many of the annoying administrative practices of the US and EU, such as giving only limited extensions, disregarding national holidays, and insisting on burdensome filing requirements, like requiring all documents filed be fully translated into Chinese. It’s no accident that my law firm’s trade team works so closely with our China law team.

Most of China’s AD/CVD actions have so far been largely symbolic and usually initiated in response to specific U.S. actions against China. Though many of China’s AD/CVD cases have involved well-known companies (Corning, Dupont, Tyson Foods, and Cadillac, to name some), most have had only limited economic impact. However, more recent China AD/CVD actions are starting to have greater economic impact. After the US and EU filed AD/CVD actions against Chinese solar cells and modules in 2011, China initiated its own AD/CVD actions against solar-grade polysilicon from the United States, EU and Korea. China’s AD/CVD action effectively closed off the largest export market for US polysilicon producers, and was a significant contributing factor to REC Silicon’s decision to shutter its polysilicon production operations in Washington and Montana. REC Silicon just this month blamed China trade actions for its less than stellar third quarter revenues.

In late September, 2016, China announced preliminary AD duties of 33.8% and CVD duties of up to 10.7% against imports against U.S. distillers’ dried grains (DDGS), an ethanol by-product used as animal feed. The U.S exported $1.6 billion of DDGS to China in 2015. China also apparently also has an AD/CVD action prepared against U.S. soybeans exports to China and is just waiting for the right time to initiate that action. The U.S. is the largest producer and exporter of soybeans and U.S. companies exported over $10 billion of soybeans to China in 2015. If the Trump Administration gets tough against China, US soybean producers likely will incur massive collateral damage in an escalating US-China trade war.

2. China Antitrust Enforcement. China may also respond against U.S. anti-China trade actions by stepping up its enforcement of its antitrust laws against U.S. companies. China implemented its anti-monopoly law only in 2008, but it has become increasingly active in reviewing mergers and investigating abuse of market dominance. In February 2015, Qualcomm paid a $975 million fine to settle Chinese antitrust allegations of having abused its market dominant position. This year, China’s antitrust authorities have targeted pharmaceuticals, medical devices, vehicle manufacturing, ocean shipping, and smart manufacturing as industries of particular concern. Because these industries are already prioritized for extra scrutiny, China could relatively easily ramp up its antitrust enforcement actions against U.S. companies in these industries to retaliate quickly against U.S. trade actions against China.

3. China Criminal Enforcement. China might also retaliate against U.S. companies by more strictly enforcing its criminal laws against U.S. company officials in China. Earlier this month, China detained more than a dozen employees of Crown Resorts, Ltd, an Australian gambling company, and it will be pursuing criminal charges against at least three of them. See Foreign Executives Arrested in China: Please Do NOT Look Away. No one knows where and when the next China anti-corruption effort will occur, but foreign companies doing business in China in important or politically sensitive industries need to be extra cautious. Company officials need to know which way the wind is blowing in China, particularly when enflamed U.S. trade rhetoric may trigger a Chinese backlash. Our China lawyers are already hearing rumors that China is going to start criminally pursuing those who use independent contractors in China but have no company in China and pay no employer or income taxes in China. China might be planning this sort of action against smaller companies as a sort of warning shot against the United States. For more on what this situation looks like, check out China’s Tax Authorities Want You.

Though Trump has talked a lot about China, China itself has so far taken the high road, noting that U.S.-China trade relations are “too big to fail.” China appears to be waiting to see if Trump’s actions will in fact harm China. For example, the United States’ abandoning the Trans-Pacific Partnership (the TPP) has actually allowed China to step in and fill the TPP void by promoting its own Regional Comprehensive Economic Partnership trade agreement (RCEP).

If the United States starts engaging in trade tactics China considers excessive, it is naïve to think China will do nothing in return. China has a home market that is in many cases the biggest export market for US producers and China has many options under its own laws to directly or indirectly retaliate against U.S. interests. Anyone wishing to do business in China or with China should consider the risks of being targeted for retaliation in a spiraling US-China trade war and they should start preparing to try to minimize the fall-out from that.

Late last month, U.S. Customs and Border Protection initiated an action before the U.S. Court of International Trade (“CIT”) to recover civil penalties and unpaid taxes amounting to almost half a million dollars from two companies that imported cigarette rolling papers, mini hookahs, smoking pipes, and pipe screens from China. U.S. Customs alleged that Green Planet, Inc. and Token Group LLC, both located at the same address in Riverside, California, had imported various smoking products from China without including the correct amount of duties owed on the import entry declarations filed with Customs.

According to U.S. Customs, between June 2010 and February 2013, Green Planet made four entries (with an entered value of $407,308.71) and Token Group made five entries (with an entered value of $1,412,456.73) of imported products from China, but failed to pay Customs over $200,000 in applicable duties that should have been declared at the time of entry. U.S. Customs alleged that Green Planet and Token Group filed import entry declarations that contained material false statements and/or omissions and their failure to exercise reasonable care in submitting information to Customs constituted negligence in violation of 19 U.S.C §1592(a).

After the entries had been made, Green Planet and Token Group or their surety companies paid Customs almost all of the outstanding duties that should have been paid. Though Green Planet and Token Group together now owed less than $30,000 in outstanding duties, Customs still decided to seek penalties of $432,975.86 against them for their having negligently filed material false statements on their Customs entry declarations. For negligent filing of entry declarations, Customs is entitled to collect civil penalties equal to twice the lawful duty amount that should have been collected at the time of entry.

It is not clear why Green Planet and Token Group did not pay the duties owed on their imported Chinese rolling papers and smoking products. Perhaps they sought to cheat Customs and purposefully tried to avoid paying lawful duties. Or perhaps they had a legitimate basis to claim the products should have been declared under a duty free tariff heading. Numerous cannabis and smoking related products have ambiguous or uncertain classification, particularly as new products are developing. Regardless of their intent, Green Planet’s and Token Group’s failure to properly file true and accurate Customs entry declarations was deemed to be negligence warranting the initiation of a Customs penalty action.

This case demonstrates how U.S. Customs will pursue penalty actions regardless of how small the amount of duties owed. I mention this because we often hear otherwise from our customs clients, many of whom wrongly believe that there is some minimum safe haven out there. There is no minimum amount Customs considers necessary to pursue a penalty action against importers and because the penalty is double the amount that should have been collected at the time of entry, underreporting can be very very costly. If you are an importer and make any material false statement or omission on your entry declaration, you are at risk of a substantial Customs penalty action.

If you catch your mistake on your customs entry declaration before Customs initiates a penalty action, you can make a prior disclosure to Customs of your error. This will help mitigate potential penalty actions, and could limit your exposure just to the amount of outstanding duties owed.

Importers need to take care to ensure their import declarations are filed accurately. Although customs brokers file Customs entry documents on behalf of importers, they are only agents of the importers and it is you as the importer who bear ultimate responsibility for any Customs entry declaration. In fast developing industries (like cannabis), importers need to be especially mindful of the customs reporting challenges to make sure their imported products are correctly declared to Customs so as to avoid penalties.

Bottom Line: Get your customs declarations right the first time.

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About China Law Blog

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.